Page 61 - IRMSA Risk Report 2021

STANLIB
CHIEF ECONOMIST
KEVIN

LINGS

EXPERT OPINION

The sustained deterioration in South Africa’s fiscal Between 2020/21 and 2023/24, the National Treasury
position, which has been especially pronounced this estimates that government’s wage bill will decrease
year due to the unexpected and devastating impact of by R310.6 billion, mainly through wage freezes for
Covid-19, largely reflects the combined effect of three management-level employees and much slower wage
major longer-term constraints. These include weak increases for other employment levels. This plan is
economic growth that has led to a persistent under- ambitious, as its success will require buy-in from the
collection of tax revenue; an ongoing need to provide broader public sector, including municipalities, SOEs
many State-Owned Enterprises (SOEs) with additional and trade unions. It also seems unlikely that government
finance; and the sharp deterioration in the efficiency of will succeed in its efforts to renegotiate the 2018 wage
government spending. agreement aimed at saving R36.5 billion in 2020/21. It is,
however, encouraging to see that the learning and culture
National Treasury have revised up their 2021 GDP function continues to receive the largest allocation of
forecast as per data in facts and figures. It remains funds, mainly for basic and post-school education and
South Africa’s reality in the short term and is the most training.
significant constraint – especially in terms of job creation
and a meaningful increase in tax revenue collection. Economic development and community development
The Minister of Finance has repeatedly highlighted that, are the fastest-growing functions at 4.6% and 4.3%,
should government make a concerted effort to implement respectively, mainly due to higher growth in road
the needed policy reforms, economic growth could infrastructure and expanded access to basic services
exceed these estimates in the longer term. Encouragingly, in line with the economic recovery plan. Unfortunately,
National Treasury does envisage an increase in fixed debt service costs continue to be the fastest-growing
investment spending in both 2022 and 2023, after expenditure item over the medium term, growing by an
a few years of sustained contraction. This growth in average of 16.1% and increasingly crowding out spending
fixed investment is supported by government’s current in most functions.
infrastructural development initiative, which appears to
be gaining some traction. The split between consumption and capital expenditure
remains unbalanced. Over the past 10 years, government
In 2020/21, government is now expecting to only collect has tended to increase consumption expenditure at the
R1.11 trillion in tax revenue, down by R8.7 billion relative expense of capital projects. This undermines economic
to the projections in June and a massive R312.8 billion growth over the longer term and is leading to the
below the budgeted tax revenue presented in the deterioration of many vital areas of service delivery,
February 2020 Budget. This significant under-collection including water, healthcare and education. The efficiency
implies that total revenue will decline by -17.9% year-on- of spending has deteriorated significantly, with the
year during the current tax year vs a budgeted increase Auditor General reporting a substantial increase in
of +5.1%. As such, the tax-to-GDP ratio is expected to wasteful and unauthorised expenditure in recent years.
decline substantially and will be South Africa’s worst This, coupled with high levels of corruption, undermines
tax performance since at least 1996. The shortfall of the effectiveness of government services and negatively
R312.8 billion has been driven by the tax relief measures affects confidence.
implemented to combat the economic effects of the
Covid-19 lockdown and the negative economic growth A key constraint of the health of government’s overall
expected this year. fiscal position is the perpetual need to provide significant
additional finance to many of the State-Owned Enterprises
The expenditure to tackle the effects of Covid-19 is (SOEs), such as Eskom and South African Airways. These
expected to result in a net increase of R36 billion, consisting bailouts, together with the under-performance of other
mainly of non-interest spending for 2020/21 relative to SOEs, have contributed substantially to government debt.
the February 2020 budget. Most of the proposed upward In addition, the government has raised expectations
expenditure adjustments are still expected to be spent regarding the implementation of several ambitious
on supporting vulnerable households and providing projects, such as National Health Insurance. Achieving
health and education services in households and schools. these ambitious goals is going to become increasingly
This includes the provision of water, sanitation, personal problematic, unless there is a substantial increase in
protective equipment and the continual deep cleaning of tax revenue and an improvement in the efficiency of
public areas. This is a step in the right direction – but is it government expenditure.
enough and sustainable?

Sources: Medium-term Budget Policy Statement 2020, Article by: STANLIB Economics Team, October 2020

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